Question

A policy initiated by the Indian Government had an adverse impact on the value of Rupee in relation to foreign exchange. What does this indicate? Discuss this with the help of a numerical example. Also explain its effect on the exports and imports of the economy.

Answer 1

Adverse Impact on the value of Rupee in relation to Foreign Exchange is known as 'Depreciation' of domestic currency.
Numerical Example: Suppose, earlier, $1$ =Rs. 60$.Ifafterthepolicy,theexchangeratechangesto$1$=Rs.65$, then it indicates that rupee has depreciated.
Effect on Exports: Due to depreciation of domestic currency, more goods can be purchased from India with same amount of foreign currency. It means, exports from India will increase as they will become relatively cheaper.
Effect on Imports: It will result in decrease in imports as foreign goods will become costlier now.